Macroeconomics - Chapter 5 Review List:

1. The ultimate objective of macroeconomics is to
a.
reduce the unemployment rate
b.
stabilize the economy's growth rate
c.
develop and test theories about how the overall economy works
d.
improve the international competitiveness of the U.S. financial markets
e.
maximize the efficiency of government intervention in the marketplace

c

2. Which of the following statements regarding Gross Domestic Product is not true?
a.
It is a stock variable.
b.
It is measured for a particular time period, usually one year.
c.
It is perhaps the most effective means of viewing the same economy over time.
d.
It is a measure of the economy's performance.
e.
It is a flow variable, not a stock variable.

a

3. Which of the following is a stock variable?
a.
business spending on capital equipment
b.
consumer income
c.
the federal government's debt
d.
the federal government's budget deficit
e.
total expenditure

c

4 Which of the following best describes a flow (rather than a stock)?
a.
you own $5,000 worth of government bonds
b.
you own a $100,000 house
c.
you own a coin collection valued at $10,000
d.
you earn $500 per week
e.
you own a $45,000 automobile

d

5. While economic expansions average about three and one half years in duration, economic contractions average about
a.
one year in duration
b.
two years in duration
c.
three years in duration
d.
four years in duration
e.
five years in duration

a

6. A recession is best defined as a period during which
a.
the percentage of the population employed is declining
b.
employment, output, and income decline
c.
the price level is declining
d.
more resources are used
e.
the budget deficit and trade deficfit are both growing

b

7. Long-term growth in production can be partially explained by
a.
trade surpluses that lead to accumulations of precious metals
b.
a gradual but consistent increase in the price level
c.
general optimism about the future and the pioneering spirit of America
d.
improvements in technology
e.
federal government budget deficits

d

8. A period of sustained growth of output in the economy is referred to as a(n)
a.
Expansion
b.
Contraction
c.
Peak
d.
Trough
e.
Recession

a

9. A period of sustained decline of output in the economy is known as a(n)
a.
Expansion
b.
growth phase
c.
Peak
d.
Trough
e.
Contraction

e

10. By a leading economic indicator, economists mean
a.
an indicator of future economic activity
b.
an indicator that measures current economic activity
c.
a highly accurate indicator that is easily measured
d.
an indicator that is accurate most of the time
e.
any variable that can measure either past or present economic activity

a

11. When economists refer to the economy’s price level, they mean
a.
the rate of inflation
b.
the price of goods and services relative to consumers' incomes
c.
a general measure of prices of all goods and services
d.
a period of level, or steady, prices
e.
the prices of a specific consumer good

c

12 Which of the following explains why the aggregate demand curve slopes downward?
a.
If the price level increases, we feel poorer and therefore buy less.
b.
If the price level increases, we feel richer and therefore buy more.
c.
If domestic prices increase, we substitute domestic goods for imported ones.
d.
If the price of a particular good increases, we substitute away from that good.
e.
A decrease in the price of a particular good is like an increase in income and therefore we buy more.

a

13 Which of the following is true of the aggregate supply curve?
a.
It portrays an inverse relationship between the price level and quantity of aggregate output.
b.
Resource utilization is constant along the curve.
c.
A decrease in the price level encourages firms to expand production because the cost of production decreases.
d.
The curve is upward-sloping.
e.
As average prices in the United States rise relative to average prices in other countries, U.S. producers find export markets more attractive than domestic markets.

d

14. An increase in the price level will cause
a.
an increase in the quantity of aggregate output supplied
b.
a decrease in the quantity of aggregate output supplied
c.
a leftward shift of the aggregate supply curve
d.
a rightward shift of the aggregate supply curve
e.
a leftward or rightward shift of the aggregate supply curve, depending on the reason for the price change

a

15. A decrease in the price level will cause
a.
an increase in the quantity of aggregate output supplied
b.
a decrease in the quantity of aggregate output supplied
c.
a leftward shift of the aggregate supply curve
d.
a rightward shift of the aggregate supply curve
e.
a leftward or rightward shift of the aggregate supply curve, depending on the reason for the price change

18. If the economy were initially in equilibrium and the aggregate demand curve shifted to the left,
a.
employment would fall
b.
the price level would rise
c.
the aggregate supply curve would shift rightward
d.
the aggregate supply curve would shift leftward
e.
the economy would experience an expansion period

a

19. The laissez-faire approach popular before the Great Depression influenced the U.S. government to see business downturns as
a.
natural phases in an otherwise healthy system, and therefore to take short-term deficit spending measures to help recovery
b.
natural phases in an otherwise healthy system, and therefore to wait for recovery to occur naturally
c.
serious maladies in an otherwise healthy system, and therefore to work to redesign the system to avoid such failure in the future
d.
failures of the type of system Adam Smith envisaged, and therefore to work to move toward a modern, more managed economy
e.
failures of the system to achieve the form that Adam Smith envisaged, and therefore to work to decrease government interference at the micro level

b

20. According to Adam Smith's The Wealth of Nations, in order to get an economy out of a depression, the government should
a.
increase spending
b.
decrease spending
c.
reduce taxes
d.
increase taxes
e.
allow the economy to correct itself

e

21. Adam Smith's "invisible hand" explains
a.
why people act in their own best interests
b.
why the government intervenes to overcome failures in private markets.
c.
how people, acting out of self-interest, unintentionally promote the general good
d.
how comparative advantage and specialization promote international trade
e.
how the creation of goods and services (supply) generates its own demand by creating employment and income

c

22. An increase in the price level
a.
means that the aggregate demand curve has shifted leftward
b.
means that inflation occurred
c.
means the employment level has decreased
d.
will shift both the aggregate supply curve and the aggregate demand curve leftward
e.
will shift both the aggregate supply curve and the aggregate demand curve rightward

b

23. An increase in government spending, other things constant, would cause a
a.
leftward shift of the aggregate supply curve
b.
rightward shift of the aggregate supply curve
c.
leftward shift of the aggregate demand curve
d.
rightward shift of the aggregate demand curve
e.
movement toward equilibrium, along curves that do not shift

d

24. Which is true of John Maynard Keynes?
a.
He believed that serious economic contractions were natural phases in an otherwise healthy system.
b.
He provided a model that closely resembled that of Adam Smith.
c.
He advocated a decrease in the money supply to stabilize the economy.
d.
He argued that increased government demand should offset reduced private sector demand to prevent depression.
e.
He advocated tax increases to balance the federal government's budget during the Great Depression.

d

25. Which of the following best describes the Keynesian approach to economic policy?
a.
supply-side
b.
Classical
c.
demand-side
d.
Mercantilist
e.
laissez-faire

c

26. The Keynesian approach to fiscal policy calls for
a.
budget deficits during periods of inflationary pressure
b.
budget surpluses during periods of high unemployment
c.
a balanced budget despite the state of the economy
d.
tax cuts during recession
e.
spending increases during inflation

d

27. The Employment Act of 1946
a.
guaranteed full employment
b.
obliged the federal government to hire as many people as it could to achieve full employment
c.
gave the federal government the power to levy an income tax
d.
imposed a responsibility on the federal government to foster full employment
e.
obligated the federal government to run budget surpluses to achieve full employment

d

28. Fine-tuning the economy means
a.
making government economic policy more "people oriented"
b.
using government policies to adjust the economy and promote economic stability
c.
tinkering with microeconomic problems such as externalities and losing sight of the big picture
d.
placing fewer regulations on the private sector, thereby eliminating the need for government intervention
e.
designing policies based exclusively on the leading economic indicators

b

29. In the 1960s, government policy makers believed that they could
a.
stabilize the economy by letting the market system solve all problems
b.
reduce unemployment by running federal budget surpluses
c.
eliminate government's role in stabilization policy
d.
use changes in the money supply to virtually eliminate business cycles
e.
use taxation and government spending to fine-tune the economy

e

30. Inflation is
a.
a rise in the value of money
b.
a decline in nominal income
c.
a sustained increase in the price level
d.
a general reduction in prices
e.
an economic problem only for the retired population

c

31. If spending by the federal government exceeds revenue,
a.
the price level tends to fall
b.
the money supply must increase
c.
the aggregate demand curve shifts leftward
d.
the aggregate supply curve shifts rightward
e.
there is a federal budget deficit

e

32. Suppose the economy is initially in equilibrium and then an energy shock occurs, such as when OPEC raised oil prices. Which of the following is likely to result?
a.
Both the price level and aggregate output will rise.
b.
Both aggregate output and the price level will fall.
c.
Employment will rise.
d.
Stagflation.
e.
The price level will fall.

d

33. Stagflation refers to
a.
a simultaneous reduction in output and the price level
b.
a simultaneous increase in output and the price level
c.
a decline in the price level accompanied by increases in real output and employment
d.
an increase in the price level accompanied by decreases in real output and employment
e.
a simultaneous increase in both the trade deficit and the budget deficit

d

34. To control inflation, President Nixon
a.
ordered wage and salary reductions for all government employees
b.
increased government spending
c.
dramatically reduced transfer payments such as Social Security
d.
applied price floors to all goods and services
e.
froze wages and prices

e

35. On an aggregate demand and aggregate supply graph, the stagflation of the 1970s can be represented as a
a.
leftward shift of the aggregate supply curve
b.
rightward shift of the aggregate supply curve
c.
rise in the price level that caused an excess demand for output
d.
rightward shift of the aggregate demand curve
e.
decrease in the price level that caused an excess supply of output

37. An increase in aggregate supply will result in
a.
lower levels of employment
b.
a rightward shift of the aggregate demand curve
c.
a higher price level
d.
a leftward shift of the aggregate demand curve
e.
an economic expansion

e

38. If the government owes $3,500 billion and then borrows $300 billion more this year,
a.
the debt is $300 billion and the deficit is $3.8 trillion
b.
the debt is $3,800 billion and the deficit is $300 billion
c.
the debt is $4,100 billion
d.
the deficit is $3,800 billion
e.
both the debt and the deficit are $3.8 trillion

b

39. Which of the following statements is correct?
a.
A budget deficit is a flow variable; debt is a stock variable.
b.
A budget deficit is a stock variable; debt is a flow variable.
c.
A budget deficit and the debt are both stock variables.
d.
The budget deficit decreases when debt increases.
e.
Debt increases when the budget deficit decreases.

a

40. The aim of supply-side economics is to
a.
increase government spending to stimulate aggregate supply
b.
stimulate exports to increase the balance of payments
c.
decrease wages to make production cheaper
d.
lower taxes to increase the supply of resources
e.
reduce both the inflation and unemployment problems through an increase in taxes